Study On The Impact Of Economic Policy Uncertainty On China’s Stock Market

As the complexity of the global economic environment and dependence of the market on economic policy deepens,the government’s frequent intervention in the economy has affected the market’s self-regulation function to some extent,increasing the uncertainty of economic policies.Since the outbreak of the world financial crisis,the increase of the economic policy uncertainty has gradually become an important factor hindering the economic recovery,meanwhile,the imperfect system and the non-standard operation of our financial market have magnified the negative effects.Looking at the stock market in our country,the development history is relatively short and some phenomena occur frequently,such as the Soaring and plummeting deviating from the economic development and the irrational reaction to market information and policies.It also lacks effective feedback regulation on the economic policy uncertainty.Against this background,the systematic and in-depth study on the impact of economic policy uncertainty on the stock market in our country can not only effectively explain the characteristics of the "policy market" and "message market" in our stock market,but also mean a great significance to improving decision-making efficiency,strengthening market supervision and stabilizing the stock market development.The study mainly develops in the following section:First of all,in the aspect of index selection,the paper contrapuntally adopts economic policy uncertainty index which is the latest research results proposed by Baker et al and clarifies the construction method and tend of the index in different countries.It is found that in the most countries,economic policy uncertainty will be affected by changing global economic situation and major political events.There is a significant inverse relationship between the index and the actual domestic macroeconomic variables.At the same time,this index can explain many phenomena.For example,the stock market fluctuates frequently and has been greatly adjusted in the short run.Secondly,in the aspect of theory analysis,the paper reviews the evolution of China’s major macroeconomic policies led by fiscal policy and monetary policy since 1990’s,and shows the fluctuation of China’s stock market during this period by means of chart combination.On this basis,it discusses the impact mechanism of typical economic policies on the stock market.In the end,when exploring the transmission mechanism of economic policy uncertainty on the stock market,it is clear that this conduction is realized mainly through two ways—real options and financial friction.The former shows that the uncertainty affects the behavior and expectation of enterprises and individuals in the stock market and thus causes the fluctuation of stock prices and the latter functions as a supplementary mechanism through the financial accelerator effect.Then,in the aspect of empirical test,the paper studies the impact of economic policy uncertainty on the stock market from the level of returns and volatility by building the VAR-GARCH-BEKK model.From the mean spillover effect test,the VAR model is estimated.In an addition,the Granger causality test,impulse response and variance decomposition also play a role of the supplementary argument to make a conclusion that there is no mean spillover of economic policy uncertainty to the stock market.While in turn,stock index returns is the Granger reason of EPU index changes,which explains the phenomenon of China’s stock market forcing policy.In the volatility spillover effect test,GARCH-BEKK model is used to find that volatility spillover of economic policy uncertainty to the stock market is not changed over time.Before the financial crisis in 2008,there existed a two-way volatility spillover effect between economic policy uncertainty and stock market,and then changed to one-way later.This phenomenon shows that in the current market environment,there is a complicated interaction relationship between economic policy uncertainty and stock market.The relationship will be affected by the change of the economic environment at home and abroad,the power from the level of the government and investors.Finally,on the basis of the important conclusions,the paper puts forward some targeted recommendations to three kinds of main body-the government authorities,regulators and investors.The government should give full consideration to the policy of prospective,initiative,stability and sustainability,timely adjust policy and reasonably guide the public.Regulatory authorities should cooperate with the sound and perfect multi-level financial market system,smooth and open a variety of investment channels to improve market supervision efficiency.Investors should learn to refer to market indicators to avoid irrationality speculation,then making reasonable market judgment and investment decisions.